Confidential

(Translation)

MINUTES * OF THE 228th MEETING OF THE COMMITTEE OF GOVERNORS

OF THE CENTRAL BANKS OF THE MEMBER STATES

OF THE EUROPEAN ECONOMIC COMMUNITY 1 82

HELD IN BASLE ON TUESDAY, 13th SEPTEMBER LT 10 a. m.

Those present at the meeting were: the Governor of the Banque

Nationale de Belgique and Chairman of the Committee, Mr. Godeaux, accompanied

by Mr. Janson, Mr. Rey and Mr. Michielsen; the Governor of Danmarks

Nationalbank, Mr. Hoffmeyer, accompanied by Mr. Mikkelsen; the President of

the Deutsche Bundesbank, Mr. Pohl, accompanied by Mr. Gleske and Mr. Rreke;

the Governor of the Bank of Greece, Mr. Chalikias, accompanied by Mr. Papademos

and Mr. Karamouzis; the Governor of the Banco de Espaiia, Mr. Rubio, accompanied

by Mr. Linde and Mr. Dur6n; the Governor of the Banque de France,

Mr. de Larosigre, accompanied by Mr. Waitzenegger and Mr. Cappanera; the

Governor of the Central Bank of Ireland, Mr. Doyle, accompanied by Mr. O'Grady

Walshe and Mr. Reynolds; the Governor of the Banca dtItalia, Mr. Ciampi,

accompanied by Mr. Dini and Mr. Masera; the President of De Nederlandsche

Bank, Mr. Duisenberg, accompanied by Mr. Sz6sz and Mr. Boot; the Governor

of the Banco de Portugal, Mr. Tavares Moreira, accompanied by Mr. P6go

Marques and Mr. da Costa Pinto; the Governor of the Bank of England,

Mr. Leigh-Pemberton, accompanied by Mr. Loehnis and Mr. Price; the President

of the Commission of the European Communities, Mr. Delors, accompanied by

Mr. Mingasson and Mr. Dixon; the Director General of the Luxembourg Monetary

Institute, Mr. Jaans. Also present at the meeting were Mr. Raymond and Mr.

Dalgaard, Chairmen of the Groups of Experts. The Secretary General of the

Committee, Mr. Morelli, his Deputy, Mr. Bascoul, Mr. Scheller and Mr. Cook,

and Mr. Bockelmann and Mr. Dagassan also attended.

The Chairman opened the meeting by announcing that the meeting of

the Committee chaired by Mr. Delors would begin in the afternoon at 2 p.m.

as planned; the time of the meeting could not be brought forward, but it

should end at 5.30 p.m. to enable the participants to depart as planned.

Final text approved at the meeting on 8th November 1988, which incorporates some drafting changes.

I. Approval of the minutes of the 227th meeting.

The Committee unanimously approved the minutes of the 227th meeting,

on the understanding that the editorial amendments suggested would be in-

corporated in the final text.

11. monitor in^ of economic and monetary developments and policies in the

EEC based on:

- Preparation by the "Dalgaard Group'' and discussion by the Committee

of Alternates;

- Statistical charts and tables.

A. Statement by Mr. Dalgaard

The firming of the dollar which had started in May had continued

until mid-August. This appreciation had been due, as before, to strong-

economic growth in the United States, leading in particular to a rise in

interest rates and some improvement in the trade balance.

The Deutsche Bundesbank had attempted to check this movement by

selling dollars, firstly alone, and subsequently together with other central

banks, including the Federal Reserve. These sales had been very considerable:

over $20 billion in the three months June, July and August. At the same

time, interest rates had been raised in Germany and elsewhere. This had

taken the German three-month money market rate from below 3.5% to 4.5%. In

spite of these moves the Deutsche Mark had remained weak, even within the

EMS, owing to large outflows of long-term capital.

August had seen a change of sentiment towards the dollar, doubtless

as a result of the cumulative effect of the very heavy intervention, the

rise in interest rates in many countries and some indications of a slackening

of growth in the United States. The Deutsche Mark had firmed against the

dollar and within the EMS. Money market rates in Germany had, in fact,

begun to fall when the discount rate was raised. It had no longer been

necessary to support the Deutsche Mark with interventions and, indeed, some

central banks had actually begun selling Deutsche Mark in early September.

The yen had moved through different phases, from weakness to

stability and, more recently, firmness.

The situation within the EMS had been calm as long as the dollar

had remained firm. At the end of Augustlbeginning of September some tensions

had surfaced in connection with the firming of the Deutsche Mark, rumours

of a realignment linked with the informal meeting of the ECOFIN Council,

and a number of special factors in certain countries. The tensions had been ,

most marked in France and in Italy. In France the interest rate differential

vis-h-vis the Deutsche Mark had narrowed from 4 points in early June to 2

points at the end of July. Pressure on the French franc had led to an increase

in interest rates, a slipping of the exchange rate within the band and

substantial interventions, totalling approximately $2 billion, around the

end of August/beginning of September.

In Italy the deterioration in the balance of payments had added

to downward pressure on the lira and the Banca d'Italia had also made use

of the three instruments: the fluctuation band, interest rates and interventions.

The interventions had been comparable to those undertaken by the French

authorities, totalling $2 billion. The important capital liberalisation and

deregulation measures scheduled for October did not seem to have contributed

to the pressure on the lira.

Other participants in the EMS exchange rate mechanism had also

been affected by these movements. The Belgian franc had been subject to the

same influences as the French franc and the Italian lira, but in addition

had suffered the repercussions of the Soci6t6 G6n6rale affair, i.e. capital

outflows following the inflows of early 1988. The Banque Nationale de Belgique

had raised its interest rates and had intervened regularly from mid-June

onwards, for a total of approximately $2 billion.

The Dutch guilder had been less robust than during the first half

of 1988. The exchange rate had weakened, interest rates had been raised and

fairly regular support interventions had been undertaken for a total amount

of over $2 billion. The interest rate differential vis-2-vis Germany had

returned to its normal level of 0.5 points.

In Denmark capital inflows had been much smaller and the Danish

krone had weakened slightly. The announcement of the abolition of the last

exchange cdntrols as from 1st October 1988 had had no effect on the market.

The Irish pound had remained firm even though there had been a

slight narrowing of the interest rate differential vis-h-vis other countries.

In all, the tensions which had surfaced recently within the EMS

appeared to be linked to the fact that interest rate differentials had been

reduced further than the market considered appropriate. The central banks

concerned had coped with these tensions by making use of the three traditional

instruments and had obtained satisfactory results. There were, however,

more fundamental differences between the EMS countries, in particular in

current-account positions, and these could be a factor in keeping certain

tensions alive.

The performance of those currencies not participating in the

exchange rate mechanism had varied. In the United Kingdom interest rates

had been raised chiefly for domestic reasons, and the announcement of a

record trade deficit had caused some nervousness in regard to sterling. Its

rate of exchange had fluctuated somewhat, but it should be noted that since

March it had remained within a fairly limited range of between DM 3.10 and

3.22.

The Spanish peseta had been stable, but since the beginning of

the year it had recorded an 8% appreciation vis-a-vis the Deutsche Mark in

spite of intervention purchases in excess of $20 billion. At the end of

August, however, the peseta had weakened in connection with the pressures

on the French franc and the Italian lira, the deterioration in the trade

balance and the narrowing of interest rate differentials vis-5-vis other

countries, and the Banco de Espaiia had carried out intervention sales.

The Greek drachma and the Portuguese escudo had continued to

depreciate slightly in effective terms.

B. Statement by Mr. Janson

The Alternates' discussion had focused on the following main

points :

1. How were recent developments on the markets, which reflected a

certain nervousness but which could not be called major tensions,

to be interpreted?

2. What could be done to strengthen market confidence in the stability

of exchange rate relations between EMS currencies and thus confirm

the recent important and concurring statements by the German and

French authorities?

3. How were the particular developments observed in the case of the

pound sterling and the Spanish peseta to be evaluated?

1. Market nervousness

Recent conditions on the exchange markets had to be placed in the

context of developments in the fundamentals.

(a) Growth was strong in most European countries, including Germany,

where it had recently accelerated. Since it was considerably stronger still L

in a number of other European countries, this was reflected both in the

development of current-account balances within Europe and in Germany's

bilateral trade relations with its partners. From the point of view of the

EMS there was no call for particular concern. Where a current-account deficit

existed, as in France or Italy, it remained at a level which gave no great

cause for concern in itself, particularly as price and cost developments

did not seem to be in any danger of getting out of control.

(b) On the price front, some Alternates observed that the climate

was in the process of changing slightly. The concern to avoid any depreciation

of the Deutsche Mark was to be seen in this light and in the light of furthering

the adjustment process. The action taken by the German authorities to this

end had been followed by the other EMS member countries, which had madause

of the various mechanisms put in place by the ~asle/~yborg Agreement.

(c) This combined action had somewhat influenced expectations of

stable exchange rates which, together with appropriate interest rate

differentials, had encouraged long-term capital movements and thereby helped

to finance the current payments imbalances. It had been emphasised that, in

some cases, these movements were adequately financing the varying rates of

investment growth in different regions of the Community and augured well

for the positive effects of the liberalisation of capital movements. However,

when there was a resurgence of rumours about exchange rate relationships

between major currencies, simply re-establishing interest differentials was

not necessarily enough to calm market expectations. Moreover, some Alternates

were concerned about the levels interest rates had reached, and saw limits

to any realistic scope for further upward adjustments.

2. The policies to be followed

(a) Some Alternates had expressed the fear that speculative pressures

on the markets could grow. With the rise of the Deutsche Mark to the top of

the EMS and the slight decline of the French franc, market operators were

reminded of the long history of realignments between these two important

EMS currencies in particular. It was therefore essential to give the markets

a clear and convincing signal to quell realignment rumours.

(b) These rumours should be quelled for a number of other reasons:

price-competitiveness relationships were little changed. The, trade-account

imbalances in Europe largely reflected the structural advantage of the

German economy, in an upward phase of the cycle, in exports of capital

goods. Moreover, it was important not to shake confidence in the declared

intention to continue efforts towards closer convergence in domestic and

external stability. It was essential, particularly during the present period

of international meetings, that any official statements should help strengthen

confidence in the stability of exchange rate relationships.

(c) In an attempt to give concrete shape to the signals of cohesion

judged desirable, the following ideas had been put forward on the basis of

assumptions regarding the dollar. It had been noted that US economic

fundamentals continued to hold out a real threat of dollar depreciation. If

the dollar were to decline, co-ordinated action to preserve stability h

the EMS and recover room for manoeuvre should take the form of a signal in

the direction of a relaxation of interest rates, initiated by Germany.

Any upward trend shown by the dollar should be countered not by a

further increase in interest rates but by co-ordinated interventions in

dollars only.

3 . Sterling and the Spanish peseta

(a) Sterling

The size of the UK trade deficit in August reflected the strength

of domestic demand in that country. In the view of the UK Alternate this

had justified the policy of progressively tightening interest rates. He

acknowledged that sterling was vulnerable at its present level and hoped

that further increases in interest rates could be avoided.

(b) The Spanish peseta

The weakening of the peseta had to be seen in the context of a

rate of inflation higher than the 3% target, the sharp deterioration on

current account and the cut in interest rates. The depreciation only partially

offset the considerable appreciation of the peseta vis-a-vis the Deutsche

Mark (of the order of 8% since the beginning of the year) in real terms.

The decline of the peseta primarily reflected short-term capital movements,

in particular under the contagious influence of pressures on the French

franc and the Italian lira.

C. Discussion by the Committee

Mr. Hoffmeyer added a few comments on the abolition of the last I

exchange controls in Denmark to which Mr. Dalgaard had referred. This would

end fifty-five years of controls and would enter into force on 1st October.

From that date capital movements would be free of restrictions, save for

two rules: firstly, a rule on financial institutions' external positions,

which was liberal and was intended to ensure that the financial intermediaries

did not speculate against the Danish krone, and secondly a tax provision

whose principle was that Danish residents had to ensure that the Danish tax

authorities received the same information about their deposits abroad as

about deposits in Denmark. Danish residents were themselves responsible for

supplying this information, so that there would be no conflict with the

national legislation of those countries in which the deposits were held.

As had already been mentioned, the announcement of the abolition -

of exchange controls as from 1st October 1988 had had no effect on the

exchange market.

The Chairman noted that there were no further comments on the

reports given by Mr. Dalgaard and Mr. Janson.

111. Adoption of the Committee's report to the EEC Ministers of Finance on

developments on the foreign exchange markets of the nineteen countries

participating in the concertation procedure during July, August and

the first few days of September 1988.

The Chairman took note of the Committee's approval of the I I concertation report", which would be submitted as usual to the EEC Ministers

of Finance.

IV. Exchange of views on recent developments in public finance and policy

implications.

The Chairman pointed out that the Committee had not been able to

hold this exchange of views at its previous meeting. Although Mr. Raymond

had already introduced the note on public finance in July, he might now

wish to repeat one or two points or perhaps bring his introduction up to

date.

A . Statement by Mr. Raymond

There was no need to bring the introduction given in July up to

date, since the note on public finance basically dealt with 1987, but the

substance of what he had said in July and of the note itself could be summarised

again.

The evolution of public finance in 1987 could be characterised by

three welcome developments and three that gave cause for concern. The welcome

developments highlighted in the note were:

- a slight overall contraction, as a proportion of GNP, in expenditure

and in the aggregate budget deficit for the Community as a whole;

- a slight improvement in convergence among member countries;

- a lessening of the conflicts between fiscal and monetary policies,

primarily as a result of a sharp reduction in direct monetary

financing of the budget deficits. - The three areas of concern were:

- the progress that had been made was very limited;

- no significant, lasting progress had been made in those countries

whose positions were the least favourable, i.e. those in which

the budget deficit or the public debt ratio was highest; this was

particularly true after adjustment for cyclical factors in these

countries, such as a temporary rise in revenue associated with

higher-than-expected growth, or the decline in nominal interest

rates, which had not continued in 1988;

- in those countries whose budgetary positions were favourable, on

the other hand, the authorities saw little scope for using the

fiscal instrument to stimulate economic activity.

B. Statement by Mr. Janson

1. Broadly speaking, the Alternates agreed with the conclusion of

the report presented by Mr. Raymond. While conflicts between fiscal and

monetary policy had lessened in 1987, budgetary developments were only in

part satisfactory. Wide differences remained in budgetary positions, which

in several cases still seemed unsustainable in the medium term.

2. The Alternates noted that in some countries interest service

on public debt had a major impact on budgetary balances. This made it harder

to reduce the deficits as adjustment efforts had to focus on non-interest

expenditure, which could be difficult to trim.

It had also been noted, on reading Table 10, that 'in some countries

substantial differences existed between gross interest payments (column a)

and these same payments after deduction, on the one hand, of revenue from

taxes on interest income (see column e ) and, on the other hand, of the

interest received by the authorities on their own financial assets (see

column h). This demonstrated the importance of the fiscal implications of

the liberalisation of capital movements for some countries and might, in

the opinion of one of the Alternates, be a useful subject for study by the

"Raymond Group".

3. The German Alternate had commented on the factors underlying

the growth of the German budget deficit and on its consequences for interest

rates. He had noted that the Bundesbank would closely monitor the price - effects of the increase in a number of taxes on consumption planned for

next year.

The Italian Alternate had stated that his Government intended

transforming the budget deficit excluding interest payments - at present

3.4% of GNP - into a small surplus by 1992, which represented an adjustment

of some 4% of GNP. Interest payments were currently equivalent to 8% of

GNP. If this objective were achieved it should make it possible to stabilise

the debt ratio in terms of GNP in 1992. This obviously depended on interest

rate developments.

4. The Alternates had also noted that the public sector deficits

were financed less and less by base money creation, i.e. by direct central

bank financing or, indirectly, through government borrowing abroad. Financing

government deficits on the domestic financial markets had in effect become

a widely followed practice in the EEC countries.

5. The discussion had shown that the impact of the public finances

on monetary policy could not be judged either from the size or from the

method of financing of the budget deficits.

A number of Alternates stressed the need to consider countries'

overall domestic saving, within which public sector dissaving could be

absorbed by a high level of private sector saving. This did not mean that

the budget deficit did not require correction in the medium term, but for

the immediate future it was more difficult to see it as a source of macro-

economic disturbance.

Similarly, one Alternate noted that the fact that ;here was no

direct central bank financing of the budget deficit was not sufficient to

place a real constraint on the management of the public finances, as the

present situation in the Community demonstrated. This would have to be

borne in mind in the study of the appropriate operational framework for a

future European central bank, and othrr forms of budgetary discipline might

have to be considered.

It had to be added that on 6th September the Monetary Committee

had stated that it might soon address the question of government budget

financing mechanisms in member countries. The staff of the Commission would

be preparing a memorandum for this purpose. Mr. Loehnis had pointed out

that for several years now the Committee of Governors had undertaken an

annual review of developments in public finance on the basis of docume<ts

which were then forwarded to the Monetary Committee, and that the Monetary

Committee should therefore take these documents into consideration in its

proposed study.

C. Discussion by the Committee

Mr. Leigh-Pemberton noted that the experts' report presented the

following conclusions: the public finance situation had been partially

satisfactory in 1987 but prospects for closer convergence within the Community

were uncertain. In the United Kingdom there had been further progress in

reducing public expenditure and in the policy of reducing the public debt.

The objective was to continue this policy over the medium term and to preserve

a balanced budget. In fact, the budget surplus could considerably exceed

the forecasts and reach 3% of GNP in 1988. Nonetheless, monetary expansion

was very vigorous owing to the sharp increase in private sector borrowing.

The economy was in fact very buoyant, domestic demand was very brisk and

exceeded supply potential, hence the deterioration in the current account

and the sharp expansion of credit. It should, however, be noted that there

was an improvement in the area of supply, productivity and employment. This

had led to an increase in real incomes, a rise in confidence within industry

and among households and also an increase in private saving. These phenomena,

which were more marked than in the other Community countries, accounted for

the differences between the United Kingdom and other member countries in

terms of monetary expansion and public finance.

Mr. Ciampi began by thanking the Group of Experts 'and its Chairman

for the report, which gave a clear and full picture of developments in the

different Community countries. Without doubt Italy had most difficulties in

this area, given the size of the public sector borrowing requirement, the

scale of the public debt and the links between budgetary performance and

the other components of the economy and the monetary situation. Although

the borrowing requirement was essentially financed by the market, it had

effects on the economy and on the monetary situation. The efforts made in

recent years had done no more than make it possible to avoid an increase in

the borrowing requirment as a proportion of GNP. The need to tackle this

problem decisively was recognised by all, and government circles and the

population as a whole had become aware of it. The programme of budgetary

adjustment was seen in the context of the European structure, of which-

Italy was very much in favour, but a certain contradiction between the

profound desire for further integration and the disorder in the Italian

public finances had to be recognised. Measures had been taken in the summer

to hold down the budget deficit but the most important thing was to put in

place a multi-year programme of successive cuts in the deficit and in the

borrowing requirement. A proposal was to be presented to Parliament before

the end of September; it would represent the first phase of a multi-year

plan whose aim was to eliminate the non-interest deficit by 1992. This was

to be achieved by raising taxes and reducing public expenditure.

The borrowing requirement, which amounted to approximately 11.5%

of GNP, posed a difficult problem even if it was not financed by money

creation or central bank intervention. For years the central bank had

consistently pressed for financing on the market; this had made it possible

to bring monetary expansion in Italy under control, but at the expense of

high interest rates, which in turn added somewhat further to government

costs. Only a few years ago, for example in 1982-83, great resistance had

had to be overcome to convince everyone of the need to avoid monetary financing

of the budget deficit. Today, thanks in particular to the persistence of

the central bank, this need was recognised by all and had become a prime

concern of the Government and of Parliament.

The Chairman pointed out that, in accordance with established

tradition, the note on public finance would be sent to the Monetary Committee

following a brief written procedure to enable the central banks to put

forward any proposals they might have for changes to the text. That the

note would be sent to the Monetary Committee might be considered additionally

expedient in that it could be useful for the study which that Committee

intended to undertake. It was also traditional to draw the note and the

Governors' comments on it directly to the attention of Finance Ministers.

Of course, the Governors would as usual receive a copy of the covering

letter to the Ministers, which would set out the substance of the exchange

of views the Committee had just had.

V. Exchange of views on the items on the agendas for the international

meetings in Berlin.

The Chairman explained that this exchange of views was traditionally

included in the agenda of the Committee's September meeting but that, m o s t

equally traditionally, the Committee did not hold any discussion on this

subject. In fact, the Governors had an opportunity to address these questions

in other forums.

The Chairman noted that there were no further comments.

VI. Other matters falling within the competence of the Committee:

- Exchange of views on the decision by the British authorities

to issue short-term Treasury bills in ECUs in the near future.

The Chairman noted that the Alternates had heard a brief report

from their British colleague concerning the decision by the UK authorities

to issue short-term Treasury bills in ECUs in the near future, and that

Mr. Leigh-Pemberton would now say something to the Committee.

Mr. Leigh-Pemberton made the following comments on the British

Government's ECU Treasury bill programme. The main objective of the programme

was to have a short-term instrument available so as to secure greater

flexibility in the management of the public debt, i.e. of official assets

and liabilities in foreign currencies. The programme was also aimed at

helping to promote the use of the ECU on the international markets and at

strengthening London's role in transactions in ECUs. There was, in fact, a

gap to be filled between the market in deposits and that in securities in

ECUs, hence the need for short-term instruments which were government-

guaranteed, actively traded and very liquid on a secondary market. Italy

had been a pioneer i n t h i s f i e l d with i ts one-year Treasury b i l l programme;

t h e United Kingdom had t h e shor t e r end of t h i s market i n mind, v i z . m a t u r i t i e s

of one, t h r e e and s i x months. L

Since t h e announcement of t h e programme i n e a r l y August t h e f i n a l

d e t a i l s had been worked out . The f i r s t tender would t ake p l ace i n October

and t h i s would probably be followed by a s e r i e s of monthly opera t ions , each

involving about ECU 500 mi l l ion , probably f o r m a t u r i t i e s of one, t h r e e o r

s i x months. I n i t i a l l y , t h e programme could be expected t o t o t a l some ECU 1

t o 2 b i l l i o n . The prospectus d i s t r i b u t e d t o t h e Al terna tes t h e previous day

would not be published f o r s e v e r a l days; it contained t h e d e t a i l s of t h e

programme, which would be reviewed i n March 1989 in t h e l i g h t of t h e experience

of t h e f i r s t s i x auc t ions . These were planned a s a continuous operat ion,

i . e . t h e in t en t ion was not simply t o borrow i n ECUs but t o develop a new

l i q u i d secondary market f o r b i l l s i n ECUs. Arrangements had been made with

a group of banks and s e c u r i t i e s houses which would a c t a s market-makersand

would market t h e instruments among t h e i r customers. The prospectus l i s t e d

t h e i n s t i t u t i o n s which had agreed t o p lay t h i s ro l e : they included t h e

major B r i t i s h houses, but a l s o banks from other Community coun t r i e s , a s

wel l a s a small number of i n s t i t u t i o n s from outs ide t h e EEC which a l ready

conducted a s u b s t a n t i a l amount of business i n ECUs.

So f a r t h e response of p o t e n t i a l i nves to r s and of market-makers

t o t h e announcement of t h e programme had been very p o s i t i v e . The UK a u t h o r i t i e s

were aware, however, t h a t i f they wished t o bui ld up a market t h e i r programme

had t o g e t off t o a good s t a r t and o the r i s s u e r s had t o e n t e r t h e f i e l d ;

they hoped t h a t i n t e r e s t would grow and t h a t o ther i s s u e r s would extend t h e

range of instruments ava i l ab le . I t would be i n t e r e s t i n g t o know whether

p lans along these l i n e s ex i s t ed i n o ther EEC coun t r i e s .

The Chairman thanked M r . Leigh-Pemberton f o r h i s i n t e r e s t i n g

remarks; he noted t h a t t h e r e were no comments and wished t h e Bank of England

and t h e B r i t i s h Treasury good luck i n implementing t h e i r programme f o r t h e

i s sue of short- term s e c u r i t i e s i n ECUs.

- Departure of M r . Janson.

The Chairman noted t h a t , owing t o t h e f a c t t h a t he was due t o

r e t i r e s h o r t l y , M r . Georges Janson was p a r t i c i p a t i n g f o r t h e l a s t t ime i n

t h e work of t h e Committee. He added t h a t t h e r e was much he could say, having

known M r . Janson s ince u n i v e r s i t y days, but t h a t he would not i n f l i c t a

long speech on him since over the past few days and in the days ahead he

had had and would have the opportunity to attend or to chair meetings

distinguished by the participation of Mr. Janson for the lait time.

Going no further than the Committee of Governors, within which he

had carried out extremely important work, Mr. Janson had established at

least three records: the record for length of service, having been a member

of the Committee for seventeen and a half years; the record for attendance,

not having been absent for one of the 180 meetings held during this period,

and, finally, the record for chairmanships, having chaired the Committee of

Alternates for three separate terms: in 1974, in 1978 and in 1988. With

such a track record, Mr. Janson could certainly look back with confidence

and satisfaction. It was with these sentiments, together with their thanks

and their best wishes, that the Governors were today taking leave of Mr. Janson.

Mr. Janson recalled that he had joined the Committee of Governors -

under the chairmanship of Mr. Carli at the April 1971 meeting, just as

preparations were being made to reduce the fluctuation band from 1.50% to

1.20%. In May 1971, the following month, the whole plan fell apart when the

Deutsche Mark and the Dutch guilder were floated. The Belgians and the

Dutch had then worked to set up a fixed link between their currencies,

called the "worm", which subsequently slipped into the "snake" to be finally

swallowed up - but not before having been the precursor of the Community

exchange rate systems. Now, seventeen or eighteen years later, the Governors

were themselves being called on to study the question of a European central

bank, and he wished them greater success than in some earlier projects.

Mr. Janson thanked the Governors for having listened to him for

so many years; he was aware that very often he said what he thought, which

could be rather irritating but was probably the best way of being understood.

He also thanked the interpreters who had had to adjust to his volubility

and speed of delivery, which was all the faster since he frequently departed

from the draft texts of his statements.

The Chairman added that Mr. Janson's departure was unfortunately

not the only one. Mr. Masera was leaving the Banca d'Italia to take up the

office of Director General of the IMI as from 1st October. The Chairman

thanked Mr. Masera for his valuable contribution to the work of the Committee

over a number of years and, on behalf of the Governors, wished him every

success in his new responsibilities.

VTT. Date and p l a c e of t h e n e x t meeting.

The n e x t meeting would t a k e p l a c e i n B a s l e on Monday, L 8 t h November

1988, beginning a t 10 a.m.

Committee of Governors of the Central Banks of the Member States of the European Economic Community

13th September 1988

Confidential

DEVELOPMENTS ON THE

WHOSE CENTRAL BANKS

BRIEF REPORT ON

FOREIGN EXCHANGE MARKETS OF THE COUNTRIES

PARTICIPATE IN THE CONCERTATION PROCEDURE

JULY AND AUGUST 1988

This report summarises developments on the exchange markets of

the countries whose central banks participate in the concertation proce- 1 dure and briefly describes their interventions during July, August andthe

first few days of September 1988.

I. EXCHANGE RATE DEVELOPMENTS

The main features of the foreign exchange markets in July and

August 1988 were:

- a further strengthening of the US dollar against most currencies

in July and early August followed by a certain decline in late

August against European currencies;

- increased, concerted intervention sales of dollars mainly against

Deutsche Mark;

- good demand for sterling and yen which stayed in a relatively narrow range against the US dollar up to the end of August when

they weakened against most currencies;

- increases of official interest rates in many countries.

The US dollar continued to move higher against most foreign

currencies during July and August. Throughout the period the dollar bene-

fited from signs of strength in the US economy which were thought likely to

1 The central banks of the EEC, Norway, Sweden, Finland, Switzerland, Austria, Japan, Canada and the United States.

lead to a tighter monetary policy and thus to higher dollar interest rates.

The Federal Reserve's commitment to containing inflationary pressures was

evident in the early August decision to increase its discount rate by

0.5 percentage point to 6.5%. Market participants were also encouraged by

the belief that the international adjustment process was proceeding, a

belief reinforced by the release of better-than-expected US trade statistics

for May and not dispelled by less favourable trade statistics for June. On

various occasions during the two months the US authorities intervened to

limit the dollar's rise, operating at times aggressively in co-operation

with other central banks. Late in August the dollar moved slightly down-

wards against European currencies. The dollar closed the period 2.3% higher

against the yen and 3.2% higher against the Deutsche Mark.

Having been stable in July the experienced some movements in

August. The Irish pound and the Deutsche Mark moved to the top of the EMS

band while the Danish krone, the French franc and the Italian lira weakened

somewhat.

The Deutsche Mark continued to weaken sharply in July and the

first few days of August. Despite sometimes substantial intervention, it

lost considerable ground against the US dollar in particular. This weakness

was caused by capital outflows from the Federal Republic, for the most part

induced by higher interest rates on most foreign markets. From the second

third of August onwards the Deutsche Mark recovered appreciably vis-a-vis

the US dollar and all other currencies. As a result, it moved to the top of

the EMS exchange rate band. On 25th August the Central Bank Council of the

Deutsche Bundesbank raised the official discount rate from 3% to 3 112% per

annum, thereby consolidating the increase in DM interest rates on the money

markets in recent weeks in the wake of the rise in US dollar interest

rates.

The further 114 point cut in the intervention rate of the Banque

de France at the beginning of July had no effect on the strong position of

the French franc throughout July and the first few days of August. The

general rise in interest rates that followed, first in the United States

and subsequently in Europe, was reflected in particular in a further nar-

rowing of the differential between German and French market rates, which

this time resulted in arbitrage in favour of the Deutsche Mark and some

weakening of the position of the franc. These pressures abated in the last

few days of August.

The Belgian franc weakened as a result of the tensions which

developed at the beginning of the period under review. The policy of the

Banque Nationale was, on the one hand, to support the currency with rela-

tively substantial interventions and, on the other, to raise its discount

and lombard rates by 114 percentage point. After some weeks of calm, the

tensions re-emerged following the general upward movement in interest rates.

The Banque Nationale thus made further sales of foreign currency and twice

raised its discount and lombard rates by 114 percentage point to bring them

to 7.5% and 7.75% respectively.

The Dutch guilder eased somewhat further against the Deutsche

Mark, notwithstanding substantial sales of dollars by the Nederlandsche

Bank and a recovery of the interest rate differential vis-a-vis the Mark

after the marked fall that had taken place earlier. In view of the develop-

ments in interest rates abroad the Nederlandsche Bank increased its dis-

count rate on 29th July and 26th August by 0.25 percentage point on each

occasion to 4.0% and its interest rate on advances by 0.5 and 0.25 percen-

tage point respectively to 4.75%.

The Danish krone declined from the upper end to the middle of the

EMS band. Danmarks Nationalbank lowered its official lending and deposit

rates by 114 percentage point to 7 314% and 8 112% respectively on 8th July.

Market rates were almost unchanged, but interest rate differentials in

favour of the krone narrowed.

Despite occasional fluctuations, the Irish pound was positioned

at the top of the EMS band for most of the period.

Seasonal factors and short-term capital inflows supported the

Italian lira throughout the summer leading to substantial intervention

purchases by the Banca dfItalia. The situation changed in the second half

of August following the Federal Reserve's discount rate hike as market

uncertainties developed about the future evolution of interest rates in

Europe. Such conditions have continued to prevail also in the aftermath of

the 112 point discount rate increase to 12.5% by the Banca dlItalia on

25th August.

Underpinned by three 112 percentage point increases in UK base

rates (from 9 1/22 at the beginning of July to 11% on 8th August) and the

perception that interest rates would need to remain high in order to combat

inflationary pressures, sterling saw periods of strong demand during July

and the first half of August, recording significant gains against European

currencies. However, sentiment turned against the pound on 22nd August amid

growing unease about the direction of the UK economy, and the release of UK

trade figures for July showing a record current account deficit caused

sterling to fall abruptly. It was steadied by a full 1 percentage point

increase (to 12%) in UK base rates on 25th August, but ended the month on a

soft note. Over the period, sterling's trade-weighted index rose by 0.8% to

75.8.

The Greek drachma weakened by 3.8% and 0.7% against the US dollar

and the ECU respectively. In effective terms the drachma depreciated by

The Spanish peseta remained firm during most of the period, weak-

ening slightly at the end of August. The Banco de Espaiia's interventions

were sporadic and, on the whole, much smaller than in any other period of

the year. In nominal terms the peseta appreciated by 0.9% against the ECU

and depreciated by 2.1% against the US dollar. The Banco de Espaiia raised

its three-month repurchase agreement rate by 114 percentage point to 10.5%;

at the same time a technical correction was introduced in the overnight

rate which was reduced by 118 percentage point to 10 318%.

The Portuguese escudo decreased vis-a-vis the US dollar by 3.6%.

As from 1st August the weights of the currencies on which the effective

exchange rate index is based were updated and in line with the objectives

defined by the authorities the escudo depreciated by 0.25% in effective

terms.

Up towards the end of August the Swiss franc continuously weakened

vis-a-vis all important currencies. This was caused by marked interest rate

increases for investments in other currencies. During that period the export-

weighted value of the franc dropped by 2.7%. It was only in the last days

of August when the franc managed to break away from its year's low. Effective

26th August, the official discount and lombard rates were raised by

112 percentage point each to 3% and 5% respectively.

The Austrian schillinq weakened by 2.9% against the US dollar in

July and August, with a monthly spread of 4.1% and 3.0% respectively.

Against the Deutsche Mark the schilling fluctuated in both months within a

range of 0.24%. With effect from 4th and 20th July and 3rd August the money

market rate for short-term open market operations was raised in steps of

114 percentage point to 4 5/82. Banks eligible for refinancing were given

additional liquidity assistance with an offer of special open market

operations from 22nd to 29th July at 6 1/2%, after a temporary undesired

liquidity shortage had arisen as a result of large interest rate induced ,

capital outflows. In line with the measures taken by other central banks,

the discount rate was raised by 112 percentage point to 4% with effect from

26th August. The lombard rate remained unchanged at 5%.

The Norwegian krone continued to weaken during the period and the

currency index moved from 110.7 to 112.6. Despite some positive indications

of reduced pressure in the domestic economy, uncertainty in the market

concerning the future stance of fiscal policy and the effect of reduced

interest rate differentials led to some outflow of foreign exchange. On

balance, however, the interest rate differential against the basket curren-

cies remained as high as 5 percentage points.

The Swedish krona weakened somewhat from the middle of July. This

was partly due to smaller interest rate differentials vis-a-vis foreign

currencies and a leads and lags effect after the heavy inflow in May. The

Riksbank intervened by selling currencies but allowed at the same time the

currency index to rise by 1 percentage point to 131.7. From the second part

of August the market has been balanced.

In effective terms the Finnish markka remained quite stable. It

was supported, however, by relatively large sales by the central bank.

Domestic market interest rates increased by over 100 basis points.

The Japanese yen declined by 2.2% against the US dollar during

July and August. Despite the overall bullish sentiment towards the

US dollar that prevailed overseas, the yen stayed within a relatively narrow

range of Yen 132 to Yen 135 under the persistent dollar-selling pressure

from Japanese exporters and institutional investors in the forward market.

Toward the end of August, however, the rumour concerning a new Japanese tax

on equity-related capital gains triggered an abrupt fall of the yen, which

dropped to a nine-month low of Yen 136.85 in the New York market on

31st August. Vis-&-vis the European currencies the yen appreciated by 0.9%.

In particular, the yen reached a new high of Yen 69.96 against the Deutsche

Mark on 18th August.

After moving to a 6 112 year high of US$ 0.8373 in late July, the

Canadian dollar weakened throughout the remainder of the period ending the

month of August near the US$ 0.8075 level - its weakest level since May. This represents a decline of 2.1% since June. Lending support to the cur-

rency in July was the good performance of the Canadian economy, firm

commodity prices, and the positive spread between Canadian and

US short-term interest rate differentials which, in turn, encouraged

foreign investor interest in Canadian dollar denominated securities. In

August, however, against the background of the US dollar's strength against

the major overseas currencies, the Canadian dollar was undermined by polit-

ical uncertainties regarding the passage of the pending ~~/Canada free

trade legislation by parliament and the outcome of a possible federal elec-

tion this fall.

INTERVENTIONS

A. Interventions in US dollars

Net sales of US dollars in July and August amounted to US$ 21.5

billion, compared with sales of US$ 0.2 billion in June. They consistedof

gross purchases of US$ 1.8 billion and gross sales of US$ 23.3 billion.

Major purchases were undertaken by the Banco de Portugal and in July the

Bank of Canada. Large sales of dollars were undertaken by a number of cen-

tral banks with the Deutsche Bundesbank, the Federal Reserve Bank of New

York and, in August, the Bank of Canada being the major sellers. A number

of central banks participated also on some occasions in concerted

interventions by selling US dollars against Deutsche Mark.

B. Interventions in Community currencies and in private ECUs

Interventions in EMS currencies and ECUs by Community central

banks amounted to the equivalent of US$ 5.7 billion compared with US$ 2.6

billion in June. The interventions consisted mainly of purchases of Deutsche

Mark with the Banca dtItalia and the Banco de Espaiia as the main buyers.

111. DEVELOPMENTS IN THE CURRENT MONTH, UP TO 9TH SEPTEMBER

After the release of various statistics indicating slower economic

growth the dollar lost some ground.

Within the EMS the French franc and the Italian lira experienced

some pressure which abated somewhat by the end of the week.

E V O L U T I O N D E L ' E C U , DU COURS M E D I A N D E S M O N N A I E S P A R T I C I P A N T A U M E C A N I S M E DE CHANGE DU SME E T D E S M O N N A I E S D E S BANOUES C E N T A A L E S D E

L A CEE NE P A R T I C I P A N T P A S A C E M E C A N I S M E , SUR L A B A S E DES COURS R E L E V E S L E 31 DECEMBRE 1986 V I S - A - V I S D U $ E U *

9s

* v o l r p a g e s u i v a n t e .

9.9.1988

E V O L U T I O N D E S L l O N N A I E S D E S BANOUES C E N T R A L E S HORS C E E P A R T I C I P A N T A L A C O N C E R T A T I O N , SUR L A B A S E D E S COURS R E L E V E S L E 31 DECEMBRE 1986

V I S - A - V I S D U $ E U *

ECU 0 , 9 3 4 2 5 ; E 0 , 6 7 7 3 ; DR 1 3 8 , 7 6 0 1 ; P T A 1 3 1 , 8 7 0 0 ; ESC 1 4 6 , 0 9 9 5 ; FIN 4 . 7 9 2 5 ; $Can 1 , 3 8 0 5 ; FS 1 , 6 2 1 5 ; Yen 159 .7993; KRS 6 , 7 7 5 0 ; K R N 7 , 3 9 7 5 ; Sch 1 3 , 6 5 2 0 ; c o u r s median d e s rnonna ies p a r t i c i p a n t a u SNE 0 , 9 2 9 1 3 . Le c o u r s median d e s rnonnaies p a r t i c i p a n t a u SNE r e p r g s e n t e l a rnoyenne j o u r - n a l i e r e d e s c o u r s d e s d e u x rnonna ies 2 marge d e f l u c t u a t i o n d e 2 . 2 5 % q u i s e s o n t 6 l o i g n e s l e p l u s d e l e u r s c o u r s - p i v o t s b i l a t e r a u x a c t u e l s .

MOUVEMENTS A L ' I N T E R I E U R DE L A G R I L L E DE P A R I T E S DU SME CALCULES SUR L A BASE DES COURS DE L ' E C U OANS L E S O I F F E R E N T E S M O N d A I E S

P A R T I C I P A N T E S

EVOLUTION OE L ' I N O I C A T E U R OE D IVERGENCE*

L ' i n d i c a t e u r d e d i v e r g e n c e a p o u r b u t d e m e s u r e r , s u r une b a s e compa- r a b l e p o u r t o u t e s l es m o n n a i e s p a r t i c i p a n t a u rngcanisrne d e c h a n g e e u r o p g e n , l a p o s i t i o n d ' u n e m o n n a i e v i s - S - v i s d e s o n c o u r s - p i v o t ECU. L ' e c a r t maximal d e d i v e r g e n c e est l e p o u r c e n t a g e maximal p a r l e q u e l l e c o u r s d e marche d e 1'ECU d a n s c h a q u e monna ie p e u t s ' a p p r g c i e r ou se d g p r g c i e r p a r r a p p o r t 2 s o n c o u r s - p i v o t ECU; il es t e x p r i m 6 p a r + 1 0 0 , l e s e u i l d e d i v e r g e n c e g t a n t + 75. L e s d o n n k e s q u i o n t s e r v i d e b a s e a 1 1 6 t a b l i s s e m e n t d e ce g r a p h i q u e sent les c o u r s d e 1'ECU e x p r i m g s e n t e r m e s d e d i v e r s e s m o n n a i e s , c o u r s q u i s o n t t o u t e f o i s c o r r i g e s d e s e f f e t s d e s f l u c t u a t i o n s d e l a l i r e i t a l i e n n e , d e l a l i v r e s t e r l i n g e t d e l a drachrne g r e c q u e au- d e l a d e l a m r g e d e 2,25% v i s - a - v i s d e s a u t r e s m o n n a i e s p a r t i c i p a n t a u SVE.

9 . 9 . 1 9 8 8

E V O L U T I O N DE L A L I V R E S T E R L I N G , DE L A DRACHME, DE L A P E S E T A E T D E L ' E S C U D O PAR PAPPORT A L ' E C U SUR L A B A S E D E S COURS DU MARCHE

R E L E V E S L E 31 DECEMBRE 1986*

f 0 , 7 2 4 9 4 2 ; DR 1 4 8 , 5 2 6 ; PTA 1 4 1 , 1 5 1 ; ESC 1 5 6 , 3 8 2 .

48

EVOLUT ION DES htONNAIES DES BANQUES HORS CEE P A R T I C I P A N T A L A CONCERTATION PAR RAPPORT A L ' E C U SUR L A BASE DES COURS D U hlARCHE

RELEVES L E 31 DECEMBRE 1986*

4

I I I l I

I I l I l

I l l l I 1 I ! ,

- %EU 1 , 0 7 0 3 8 ; $Can 1 , 4 7 7 6 6 ; FS 1 , 7 3 5 6 2 ; Yen 171 ,046 ; KRS 7 , 2 5 1 8 1 ; KRN 7 , 9 1 8 1 2 ; SCh 1 4 , 6 1 2 8 ; F I M 5 ,12978 .